Category Archives: Banking

SEBA Bank Launches SEBA Earn to Enable Institutional Access to Crypto Earning Economy

SEBA Bank, a a fully integrated, FINMA licenced digital assets banking platform, today announced the launch of SEBA Earn, an institutional-grade solution enabling clients to earn yield on their crypto holdings.

The launch of SEBA Earn caters to growing demand from institutions to manage a range of digital asset yield use cases from staking to decentralized finance (DeFi), and centralized lending and borrowing. SEBA Earn’s comprehensive staking management platform will enable institutions and individuals to generate rewards from their crypto investment on networks including Tezos, Polkadot, and Cardano; with more protocols coming in the coming months.

As the DeFi industry has rapidly grown to reach a total value locked of over USD 80 billion, institutional investors are seeking trusted and regulated counterparties to provide services in the space. SEBA Bank will be the first regulated bank to offer a FINMA licenced gateway that will enable professional and institutional investors to access yields in permissioned DeFi protocols.

SEBA Earn will also provide support for centralized lending and borrowing services, enabling investors to generate yield by lending Bitcoin and Ethereum directly with SEBA Bank. As part of the ongoing development of SEBA Earn, SEBA Bank will continue integrating support for additional coins.

Guido Buehler, CEO of SEBA Bank, commented, “It is clear that as institutional interest in digital assets accelerates, investors have a broader appetite for crypto assets, with a particular interest in earning services like staking, DeFi and centralized crypto borrowing and lending. SEBA Earn, our comprehensive digital asset earning offering, provides professional and institutional players with a flexible platform and a trusted, regulated provider to securely enter the space. Innovation is a core tenet of our philosophy at SEBA Bank and I am excited to demonstrate our industry-leading innovation in delivering our clients the cutting-edge technology that they need to stay apace with the rapidly evolving digital assets industry.”

NatWest Plc pleads guilty in criminal proceedings

National Westminster Bank Plc (NatWest) entered guilty pleas at Westminster Magistrates’ Court to criminal charges brought by the Financial Conduct Authority (FCA) under the Money Laundering Regulations 2007 (MLR 2007).

NatWest accepts that it failed to comply with regulation 8(1) between 7 November 2013 until 23 June 2016; and regulations 8(3) and 14(1) between 8 November 2012 until 23 June 2016 under MLR 2007 in relation to the accounts of a UK incorporated customer. These regulations require certain firms, including those regulated by the FCA, to ensure they have adequate anti-money laundering systems and controls to prevent money laundering.

The case has now been referred to the Southwark Crown Court for sentencing.

This is the first criminal prosecution under the MLR 2007 by the FCA.

No individuals are being charged as part of these proceedings.

Denis Beau: What will shape the future of crypto-assets

Opening address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Banque de France webinar, 15 June 2021.

Crypto-assets is a stimulating topic for a Central Banker and one that cannot leave him indifferent!

It should be remembered that, historically, crypto-assets have been designed to be issued in a decentralised manner, with the ambition to replace legal currencies: the very denial of the Central Banker’s functions.

Clearly, the initial objective was not achieved. So far, crypto-assets have proven to be much less efficient than our traditional currencies, for different reasons, starting with price volatility, transaction costs and delays, which make them difficult to use as a means of payment, not to mention the risks they expose their users and service providers.

However, we cannot ignore the potential for innovation of crypto-assets and their underlying technology, the technique of distributed ledgers or blockchain. Already in 2017, with the Madre project, the Banque de France was one of the first central banks in the world to use this blockchain technology for an interbank use case. At the rate of innovation, it is a long history, but since then we have been closely monitoring the development of this vibrant blockchain and crypto-assets ecosystem, the opportunities it creates and the risks it carries.

To open this webinar, I would like to share with you some thoughts on this ambivalence of crypto-assets from the point of view of a central banker and a supervisor:

First, the challenges and opportunities of crypto-assets development.

Second, what we are doing at the Banque de France to address these challenges.

1. Challenges and opportunities

The world of the blockchain and crypto-assets is still an immature ecosystem: it is difficult to predict in which direction and in which scale it will develop, but the emergence of many use cases related to decentralised finance, the creativity of the ecosystem, point to many opportunities. In particular, one can imagine that the innovations being developed will improve our payment systems, especially for cross-border transactions, or also securities issuance and settlement mechanisms…

The main challenge is therefore to ensure that the emergence of crypto-assets and, more generally, decentralised finance contribute to the effectiveness and security of our financial system.

Because this nascent ecosystem is also a source of many risks. The international work of public authorities highlighted these issues from the risk of money laundering to the risk of the consumer or investor.

I would like to highlight one of them: the risk related to the network effect. This risk was mentioned when some Bigtechs considered creating supra-national “currencies”: by offering to an extremely large customer base, these projects raised questions about monetary sovereignty of the states, as well as serious questions about the functioning of competition. Users may de facto be captured by an ecosystem and have no choice of their payment service, or at least be influenced by Bigtechs to use their services at the expense of competitors. But the opposite risk exists: payment system fragmentation, which can lead to a deterioration in the service to users.

Central banks have a long experience with these issues, especially in the field of payments. In this respect, the balance of cooperation and competition between industry players, in other words “co-opetition”, has proven to be historically valuable. One of the challenges now is to maintain these “co-opetition” relationships over time, ensuring that they can include all players and coordinate effectively the payment systems (and ecosystems) – traditional or innovative.

2. The Banque de France’s action

To help meet these challenges, at the Banque de France, we develop our actions along two lines:

(i) The first one is to support and implement regulatory frameworks and supervisory practices that promote both innovation and the stability of our financial system

Most of the current regulatory framework was designed before the technological “breaks” that we now face. It therefore seems logical to adapt it to these technological changes and to the challenges and risks associated with them. The same applies, of course, to our supervisory framework and methods.

In terms of regulating crypto-assets, France pioneered the establishment of a legal framework in 2019, with two objectives:

  • Creating legal certainty and trust to promote the development of a healthy and innovative ecosystem;
  • Preserving innovation by being careful not to curtail further development opportunities and risk depriving the economy of beneficial innovations.

With these two objectives in mind, we also support the European project for Markets in Crypto-Assets (MiCA), which will, in particular, provide a first harmonised EU-wide regulatory framework for stablecoins.

(ii) be involved as a player in financial sector developments

However, adapting the regulatory framework is not sufficient. At the Banque de France, we believe it is necessary for us to also be a factor in the evolution of the financial sector by pursuing two objectives at this stage: to facilitate and experiment.

Under the first objective, one of our aim is, for example, to foster the emergence of European projects capable of strengthening Europe’s payments system, building on the major integration projects we have seen in the past. Pursuing this objective also leads us to set up a forum, the Fintech Forum, which brings together players from our national financial ecosystem, to identify needs for regulatory developments related to innovation.

As part of the experiment, at the Banque de France we are currently conducting a programme on a digital central bank currency for the settlement of interbank transactions. We want to assess to what extent and under what conditions it could improve the efficiency and security of settlement of financial assets transactions, while preserving the fundamental role of central bank money in the smooth and safe execution of these transactions.

The Banque de France also takes an active part in the work conducted by the Eurosystem under the aegis of the ECB in relation to a digital retail euro. The challenge is to assess whether and how a digital central bank euro is needed. As we do when analysing market developments, our analysis encompasses all the potential impacts of such innovation. We need to ensure that we do not compromise more general public objectives such as monetary and financial stability, organise coexistence with other forms of public money and commercial banks, and promote innovation and efficiency in the financial system.

Naturally, our experiment is not limited to questions of digital central bank money. As part of our observation on the development of crypto-assets, we plan to participate in market experiments to help define the role of supervisors in this ecosystem.

I’ll stop there to give way to the two round tables of this webinar.

The two themes chosen are: “Crypto-assets, risks and regulation” and “Crypto-assets, what will become a standard?”. They seem to me to be two very complementary ways of addressing the issues that I have highlighted. I am sure that the cross-section of American and European views will add to the debate.

Panetta: A digital euro to meet the expectations of Europeans

Introductory remarks by Fabio Panetta, Member of the Executive Board of the ECB, at the ECON Committee of the European Parliament

Frankfurt am Main, 14 April 2021

Madam Chair, honourable members of the Committee on Economic and Monetary Affairs,

Let me start by thanking you for inviting me to report on the outcome of the ECB’s public consultation on a digital euro. We are publishing our analysis of the responses we received on our website today.

A digital euro can only be successful if it meets the needs and expectations of European citizens. This is why our consultation will provide valuable input for the Eurosystem’s decision – this summer – on whether we should start a digital euro project. The consultation will also inform future work on the design of a digital euro if a project is launched.

For the participants in the public consultation, the most important features of a digital euro are privacy, security and broad usability. In my remarks today, I will discuss how we can meet their expectations. But first let me share with you the main findings from our consultation.

Main findings from the ECB’s public consultation

We received more than 8,000 replies, an all-time record for ECB public consultations. The overwhelming majority of the responses came from citizens, while 460 were from businesses and professionals in the payments sector.

The consultation was open to everyone, and participants contributed on their own initiative. This means that the sample of respondents is not statistically representative of the European population. Nonetheless, the breadth and depth of the responses offer valuable insights.

Our report discusses the results in detail. Today I will therefore simply highlight the key findings.

Privacy was considered to be the most important feature of a digital euro in about 43% of replies. Nevertheless, respondents recognise the need for the digital euro to have features that prevent illicit activities like money laundering or terrorist financing. Other important characteristics include the possibility of using the digital euro for secure payments (ranked first by 18% of the respondents), throughout the entire euro area (emphasised by 11% of the respondents), without additional costs and offline (underlined by 9% and 8% of the respondents respectively).

Citizens and professionals agree that a digital euro should be integrated into existing payment infrastructures. The vast majority of respondents believe that banks, payment institutions and other intermediaries have an important role to play in providing services related to a digital euro. They suggest, for example, that a digital euro should be integrated with mobile and online payments and banking services. They expect the additional services that would build on the basic payment functionalities of a digital euro to trigger innovation and efficiency. A sizeable share of participants also highlight that the digital euro should make cross-border payments faster and less costly. And more than half of respondents are willing to test, adopt or contribute to the design of a digital euro in order to make it an effective means of payment.

Privacy first

As I have already mentioned, privacy emerges as the most important feature of a digital euro. Protecting users’ personal data and ensuring a high level of confidentiality will therefore be a priority in our work, so that the digital euro can help maintain trust in payments in the digital age.

At the ECB we started to explore privacy in digital payments early in our work on a central bank digital currency, and we will continue to do so through further analyses. The results of our technical experimentations are available on our website and summarised in to my remarks today.

Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data. A digital euro would therefore allow people to make payments without sharing their data with third parties, other than what is required by regulation. This differs from private payments, where services are generally offered in exchange for personal data that are then used for commercial purposes.

Privacy is an important prerogative because it influences people’s personal lives and fundamental rights. It must nonetheless be carefully assessed against other important considerations in the general interest. Digital euro payments could guarantee different degrees of privacy, involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities. Such trade-offs also characterise traditional means of payment, which provide various degrees of privacy, ranging from anonymity for cash payments to full disclosure for digital transactions that require documentary verification and monitoring of operations.

In theory, digital euro payments could be anonymous if users’ identities were not verified when they access digital euro services. But this anonymity would provide fertile ground for unlawful activities and could prevent compliance with regulations on anti-money laundering and combating the financing of terrorism.

Anonymity would also prevent limits being imposed on the use of digital euro when necessary – for example to safeguard financial stability and banking intermediation by preventing excessive capital flows or excessive use of the digital euro as a form of investment.

Even if users have to identify themselves when they first access digital euro services, different degrees of privacy can still be maintained for their payments. Certain transactions could be conducted without the payment details being shared with third parties. For example, if low-value offline payments were offered, they could be settled between the payer and payee without any data being shared with intermediaries.

For electronic and large-value transactions, details should be available to intermediaries. But privacy enhancing techniques could still ensure a high level of privacy. For example, the identity of users could be kept separate from payment data, allowing only financial intelligence units to obtain this information and identify the payer and payee when suspicious activity is detected.

Our preliminary experimentation on a digital euro is showing promising results on how technology can be used to protect user privacy without relaxing standards against illicit activities.

But there could also be cases where transparency of payments would be in the interest of consumers. For example, it may be necessary to verify a payment after it has been conducted to prove that the transaction took place or if a refund is required. In any event, cash would remain available alongside a digital euro. Consumers would be able to continue to make anonymous payments with banknotes, if they wish to do so.

We will take all these factors into consideration as we continue our work and seek the views of stakeholders to find the right balance. This includes maintaining a close dialogue on the implications of potentially issuing a digital euro and the framework that would be needed to do so with the legislators and institutions that set the rules on privacy and data protection.

A digital euro as a new and secure payment solution

The security and usability of the digital euro are also particularly important for prospective users.

Electronic payments are becoming increasingly popular, so a digital euro would ensure that sovereign money – a public good that central banks have been offering to citizens for centuries – remains available in the digital era. People could have full confidence in both the digital euro and cash, since they are both backed by a credible central bank. This is a unique feature that no private payment scheme can provide.

Let me emphasise, once again, that a digital euro would not mean the end of cash. It would complement cash, not replace it. In doing so, a digital euro would contribute to a more diverse payments landscape, giving people greater choice in how they pay. This is also why the digital euro cannot and will not be a tool used to impose negative remuneration on money. If digital euro holdings were to be remunerated, the remuneration of individuals’ holdings for basic retail use would not go below zero. And effective choices on the design of a digital euro would eliminate risks to financial stability and banking intermediation.

A digital euro would encourage further innovation and digitalisation in retail payments. Supervised intermediaries such as banks and payment institutions could build on the digital euro to offer additional services to end users. Respondents to our consultation expect the digital euro to foster the provision of services that add value, like those covered by the revised Payment Services Directive and those that could offer the possibility of linking a payment to an external condition.

We are currently focusing on domestic needs in the euro area. But a digital euro could also help to address inefficiencies in cross-currency and cross-border payments. We are working with other major central banks to reap the potential benefits of digital currencies at the global level. We want to gain a better understanding of the implications of different types of central bank digital currencies while controlling the possible risks to both domestic and foreign economies.

Conclusion

Let me conclude. The record level of participation in our public consultation and the willingness of citizens and professionals to support a digital euro are encouraging. Their responses show the high expectations that prospective users have for a digital euro and provide valuable input for our work.

We are treating this matter with priority and will move as rapidly as possible. But we also need to take the time to do it right. In the coming months, the ECB’s Governing Council will decide whether to start a formal investigation phase on a digital euro.

In such a phase, we would carefully analyse possible design options and user requirements as well as the conditions under which financial intermediaries could provide front-end services built on a digital euro. We expect this analysis to take around two years.

At the end of the investigation, the Governing Council would take a decision on the design and on whether to move to the implementation of user requirements. This phase, which would take several years, would see the development of integrated services, testing and possible live experimentation of a digital euro.

Only at the end of this process would the Governing Council be able to decide whether or not to launch a digital euro. We will do our best to ensure that a digital euro meets the needs and expectations of Europeans.

But it can only be a common European enterprise. The alignment of European authorities and institutions, mindful of their respective mandates and independence, will be key if a digital euro is to be accepted. I am therefore pleased to see that this Committee welcomed our work in its recent resolutions on the ECB Annual Report and the international role of the euro.

As co-legislators and representatives of Europeans, you have a fundamental role to play in the discussions on the framework that would be needed to issue a digital euro. This is why I very much appreciate exchanges like the one today.

FCA starts criminal proceedings against NatWest Plc

The Financial Conduct Authority (FCA) has today announced that it has commenced criminal proceedings against National Westminster Bank Plc (NatWest) in respect of offences under the Money Laundering Regulations 2007 (MLR 2007).

The FCA alleges that NatWest failed to adhere to the requirements of regulations 8(1), 8(3) and 14(1) of MLR 2007 between 11 November 2011 and 19 October 2016.

These regulations require the firm to determine, conduct and demonstrate risk sensitive due diligence and ongoing monitoring of its relationships with its customers for the purposes of preventing money laundering.

The case arises from the handling of funds deposited into accounts operated by a UK incorporated customer of NatWest. The FCA alleges that increasingly large cash deposits were made into the customer’s accounts. It is alleged that around £365 million was paid into the customer’s accounts, of which around £264 million was in cash.

It is alleged that NatWest’s systems and controls failed to adequately monitor and scrutinise this activity.

NatWest is scheduled to appear at Westminster Magistrates’ Court on 14 April 2021.

This is the first criminal prosecution under the MLR 2007 by the FCA and the first prosecution under the MLR against a bank.

No individuals are being charged as part of these proceedings.

Jens Weidmann re-elected as Chair of the BIS Board of Directors

  • Deutsche Bundesbank President Jens Weidmann re-elected as Chair of the BIS Board of Directors.
  • Mr Weidmann’s third three-year term will start in November 2021.
  • BIS Directors thank Mr Weidmann for his contribution.

The Board of Directors of the Bank for International Settlements (BIS) has re-elected Jens Weidmann, President of the Deutsche Bundesbank, as Chair of the BIS Board for a third three-year term.

The term will commence on 1 November 2021, after Mr Weidmann’s current term of office expires. He first assumed his responsibilities as Chair of the BIS Board on 1 November 2015.

The Directors thanked Mr Weidmann for his leadership during this challenging period and welcomed his continued service to the Bank.

The Board is responsible for determining the strategic and policy direction of the BIS, supervising BIS Management, and fulfilling the specific tasks given to it by the Bank’s Statutes. It meets at least six times a year and has 18 members.

Bordier & Cie SCmA to offer cryptocurrencies to their customers* via Sygnum’s all-in-one B2B banking platform

Bordier & Cie SCmA, a leading Swiss private bank founded in 1844, has expanded its offering to include cryptocurrencies by incorporating Sygnum’s B2B banking platform. This partnership enables Bordier’s clients* to invest today in the digital asset economy with complete trust, and lays the foundation for a broader offering of regulated digital asset products and services, including sophisticated trading strategies with options, and the ability to invest in previously hard-to-access asset classes via tokenization.

  • Bordier clients can now securely buy, hold and trade cryptocurrencies such as Bitcoin, Ethereum, Bitcoin Cash and Tezos, and gain diversified exposure via Sygnum’s suite of digital asset management products.
  • Total market capitalisation of cryptocurrencies increased almost four-fold in 2020, making it the best-performing asset class and a powerful tool for portfolio diversification – thus also increasing client-demand.
  • In under 60 days, Bordier & Cie was able to fully integrate Sygnum’s B2B banking platform and offer seamless access to digital assets to their own clients.

Driven by increasing client demand, Bordier has expanded its private banking services to include digital assets through a partnership with Sygnum Bank, leveraging the latter’s B2B banking platform. Sygnum’s all-in-one digital asset solution is seamlessly integrated with Bordier’s existing infrastructure. At this stage, clients* of Bordier can now buy, hold, and trade cryptocurrencies on an execution only basis. They can trade Bitcoin, Ethereum, Bitcoin Cash and Tezos, with the highest level of security and compliance provided by a Swiss regulated bank. The offering will be extended as clients become more at ease with the simplicity of the new service.

Investment diversification via cryptocurrencies has gained significant momentum

Cryptocurrencies have gained significant momentum in the past year, with total market capitalisation increasing almost fourfold to reach USD 1 trillion – making it the best-performing asset class in 2020. In a portfolio context, cryptocurrencies’ high-growth and low-correlation to traditional assets makes them a powerful tool to enhance diversification and achieve superior risk-adjusted returns. Bitcoin, in particular, which many see as the new “digital gold” due to its ability to hedge against inflationary pressure, has seen strong institutional adoption as an alternative investment.

Evrard Bordier, Bordier & Cie’s SCmA Managing Partner, says “We have seen increasing demand from our clients to diversify into alternative asset classes such as digital assets. By partnering with Sygnum Bank, we are providing our clients* with a one-stop, integrated solution while empowering them to invest in this new, high growth asset class with complete trust.”

Sygnum’s all-in-one, the integrated solution delivered quickly

Sygnum’s B2B banking platform is an integrated digital asset solution encompassing not only the technical infrastructure but also compliance as a service, research, and sales education as well as access to a broad range of digital asset products. With seamless integration and a modular set-up, Bordier was able to design, customise and implement their own secure digital asset offering with a short time to market of less than 60 days.

In this partnership, Sygnum provided the digital asset specialist expertise and an all-in-one, market-ready B2B banking platform which includes the safekeeping of private keys, selection of and connectivity to liquidity providers, digital asset AML, and transaction monitoring. Bordier & Cie will continue to manage its client* relationships, and clients* will be able to access Sygnum’s suite of digital asset management products. This new integration is aimed at simplifying the transactional process for clients, providing them with the option to invest in the asset class at their own convenience, and eliminating the need for multiple channels.

“Bordier continues its 177-year tradition of safeguarding clients’ wealth for future generations by offering the ‘next generation’ of assets to its clients*. Bordier’s timeless values and Sygnum Bank’s vision for Future Finance is a powerful combination in the changing financial landscape,” adds Mathias Imbach, Sygnum Bank’s Group CEO.

* “execution only” clients

Michelle W. Bowman: My Perspective on Bank Regulation and Supervision

At the Conference for Community Bankers sponsored by the American Bankers Association (via prerecorded video)

Good morning. I want to thank the American Bankers Association for inviting me to speak to you today. Two years ago, I gave my first speech as a Federal Reserve governor at this conference in San Diego, and it is always great to be with you—even if remotely from our recording studio at the Board.

It’s fair to say that a lot has happened over the past two years. It is an understatement to say that the COVID-19 pandemic has created significant challenges inside and outside the banking sector. Bankers significantly adapted operations to continue serving their communities and customers. You overcame staffing challenges and other hurdles, kept the virtual doors open, worked with your customers, and provided assistance to workers and businesses through the Paycheck Protection Program. Those efforts have made, and continue to make, a huge difference in the lives of many people affected by the pandemic, and I thank you.

Since becoming a member of the Federal Reserve Board, I have made it a priority to enhance the Federal Reserve’s dialogue with community bankers. I have embarked on an effort to meet with the leaders of every community bank and regional bank supervised by the Federal Reserve. This valuable interaction helps build an understanding of issues affecting small and regional banks, support supervisory decision-making, and shape some of my perspective. It has also helped the Federal Reserve identify initiatives to support the vital role of community banks in serving the financial needs of communities.

Today, I would like to share my approach to supervision and regulation, which has helped guide the Fed’s efforts to improve oversight of community banks over the past few years and shaped our priorities for 2021 and beyond. In most cases, my points about banking regulation also apply to supervision. I will then focus on several Federal Reserve initiatives that are underway to support community banks during the pandemic and into the future.

The first principle is fundamental to regulation but sometimes bears repeating—regulation should always strike the right balance. For banking regulation, that means a balance between actions that promote safety and soundness and actions that promote an acceptable and manageable level of risk-taking. The challenge is doing neither too little to be effective to achieve the public benefit of government oversight, nor too much to prevent the regulated businesses from meeting their customers’ needs. Some regulation is appropriate and necessary but striking the right balance means that at some point regulation can go too far and end up reducing the public’s welfare. In recent years, the Federal Reserve and other agencies have made oversight more effective by better differentiating prudential regulation and supervision based on the asset size of banks, the complexity of their activities, and the related risks they pose to the financial system. This is especially important for community banks, most of which managed risks well before and during the 2008 financial crisis and have managed their risks well since. Achieving these principles also requires following consumer protection laws and regulations, including fair lending laws, to ensure fairness and broad access to credit and financial services that enable economic opportunity for individuals and communities.

The second principle is that the regulatory framework should be effective, but also efficient, and that means assessing the impact of the requirements. For the Federal Reserve, it means that we consider both a rule’s benefit to safety and soundness and any potential negative effect, including limiting the availability of credit and services to the public, and the implications of compliance costs on banks. The wisdom in this approach is evident when considering the effect of a regulation on community banks and their role in providing financial services to their communities. Community banks have often been one of the few or only sources of credit and financial services to their customers. Their smaller operational scale relies on fewer staff to reach a more disbursed customer base with limited resources for compliance activities. Regulations should consider the potential impact on the availability of services in a community, as well as the costs to the bank of implementing a rule, particularly in more rural locations. It is necessary that a full and careful practical analysis of costs and benefits be a part of every rulemaking.

The third principle is that regulation and supervision should be consistent, transparent, and fair. Regulators are obligated by law to act in this manner, and it also makes good practical sense. These principles enhance safety and soundness and consumer compliance by making sure supervisory expectations are clear and that banks understand and respect the regulatory requirements. Supervisors should not and cannot be everywhere at every moment. But they should be available to provide clarification or answer questions when needed. A clear understanding of the rules and our expectations and a respect for the reasonable application of them is an effective approach to ensure effective compliance. By promoting respect and trust between regulators and the supervised institution, banks are more likely to communicate throughout the examination cycle to inform supervisors of changes they may be considering or challenges they may be facing and how best to resolve or approach them from a regulatory perspective.

A final principle that flows from consistency, transparency, and fairness is that rules and supervisory judgments must have a legitimate prudential purpose, and in the majority of cases must not be solely punitive. The goal should be to encourage sound business practices and activities by supervised institutions. By clearly communicating our objectives, we build respect for the rules and make it more likely that any remedial actions against an institution will not be necessary because we encourage compliance through our supervisory approach. When a supervisory action or formal enforcement action is required to address violations at an institution, those actions should be framed in a way that seeks to promote safe, sound, and fair practices and not simply as punishment.

These principles that guide my approach to regulation and supervision are consistent with many of the major steps that the Federal Reserve has taken to improve community bank oversight since the implementation of the rules following the 2008 financial crisis. Some predate my arrival at the Fed, and some I have played a significant role in achieving. Most of these actions involve tailoring rules that treated community banks in the same way as larger, more complex institutions. For example, the Volcker rule was aimed at curbing proprietary trading by large banks, but it ended up creating significant compliance costs for community banks, which are not involved in this type of trading.

Many of the most important improvements to the Federal Reserve’s regulatory framework involve tailoring rules to fit to the size, business model, and risk profiles of community banks. For example, we raised the asset threshold for small banks to qualify for an 18-month exam cycle and similarly raised the threshold for small bank holding companies to be exempted from consolidated risk-based capital rules. The concept of tailoring is also expressed in our community bank supervisory framework, which has been updated to implement the Bank Exams Tailored to Risk (BETR) program. The BETR program allows examiners to identify higher and lower risk activities and, in turn, streamline the examination process for lower risk community banks, thereby reducing burden. In fact, Federal Reserve examiners have tailored examinations by spending approximately 65 percent less time on low/moderate risk state member bank exams than they do on high-risk exams. We also implemented the community bank leverage ratio that allows institutions to opt out of risk-based capital requirements. The Federal Reserve and the other agencies also raised the threshold for when an appraisal is required for residential real estate loans and tailored safety-and-soundness examinations of community and regional state member banks to reflect the levels of risk present and minimize regulatory burden for banks.

These improvements in regulation and supervision have helped right the balance I spoke of earlier between safety and soundness and consumer protection, on the one hand, and the ability to provide financial services and best meet the needs of their customers. We have also considered the impact of our actions, seeking to revise rules that impose significant costs to community banks but provide limited benefit to safety and soundness, consumer protection, or financial stability.

As a part of this approach, I have also prioritized efforts to improve the consistency, transparency, and reasonableness of regulation and supervision. One of those efforts is promoting greater consistency in supervisory practices across the Federal Reserve System. For example, we are actively working to improve the timeliness of providing banks with consumer compliance exam findings. Further, we are exploring ways to strengthen our ability to understand, monitor, and analyze the risks that are affecting community banks. A key aspect of consistency is ensuring the same supervisory approach and outcomes for similarly situated institutions, with the goal of ensuring, for example, that a “one” composite or component rating in a particular region would be the same for an institution with similar activities and practices in another region. This applies to all areas of our supervisory responsibility, whether safety and soundness, consumer compliance, or analyses of financial stability risk.

I’d like to expand on one important area of focus, which is essential to the future success of the community banking sector: accessible innovation and technology integration. This subject is one that I speak about frequently with stakeholders and our staff at the Board. We are committed to developing a range of tools that will create pathways for banks to develop and pursue potential partnerships with fintech companies. This includes clearer guidance on third-party risk management, a guide on sound due diligence practices, and a paper on fintech-community bank partnerships and related considerations. These tools will serve as a resource for banks looking to innovate through fintech partnerships.

Technological developments and financial market evolution are quickly escalating competition in the banking industry, and our approach to analyzing the competitive effects of mergers and acquisitions needs to keep pace. The Board’s framework for banking antitrust analysis hasn’t changed substantially over the past couple of decades. I believe we should consider revisions to that framework that would better reflect the competition that smaller banks face in an industry quickly being transformed by technology and non-bank financial companies. As part of this effort, we have engaged in conversations and received feedback from community banks about the Board’s competitive analysis framework and its impact on their business strategies and long-term growth plans. We are in the process of reviewing our approach, and we are specifically considering the unique market dynamics faced by small community banks in rural and underserved areas.

Soon after the pandemic began early last year, the Federal Reserve took several actions to support community banks and their ability to help affected customers. We paused examinations and issued supervisory guidance that made it clear that we would not criticize or take public enforcement actions against a bank that was taking prudent steps to help customers and making good faith efforts to comply with regulations. This certainty of regulatory treatment created an environment that built trust between regulators and bankers. It enabled banks to continue to meet the needs of their customers who were struggling with circumstances through no fault of their own.

Let me conclude by again commending the important role that community banks have played in providing financial services during these challenging times. You responded quickly to the needs of your customers and communities to provide financial services with limited, if any, interruption. You persevered to implement the largest proportion of Paycheck Protection Program funds to small businesses, whether they were your existing customers or new customers. These relationships are the hallmark of community banking, and as we look toward the future, community banks will continue to play an essential role in supporting customers, delivering financial services, and providing resources to their communities and customers.

Let me stop here and thank the organizers for another opportunity to speak to you at this important conference. I look forward to your questions, Rob.

Yannis Stournaras: Welcome address – 4th ECB Simulation Conference

Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 4th ECB Simulation Conference, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth,11 December 2020.

It is with great pleasure that I welcome you once again to the ECB Simulation Conference, the fourth one, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth.

During the year since the last conference we have all lived in unprecedented circumstances due to the COVID-19 pandemic outbreak around the globe. The pandemic has taken a heavy toll, primarily on human lives, as well as on citizens’ economic welfare. Governments both in Europe and elsewhere in the world had to respond by taking resolute action in order to shore up public healthcare systems and by imposing social distancing measures with a view to containing the spread of the pandemic, which have however further weighed on economic activity. In an effort to mitigate the socioeconomic effects of the pandemic and of the related containment measures, official authorities promptly took crucial decisions.

On the fiscal policy front, all European governments have resorted to high public spending to support output and employment, as well as to boost the economic recovery. Furthermore, at a collective level, the EU’s long-term budget (Multiannual Financial Framework) coupled with the establishment of the Next Generation EU recovery instrument constitute the largest ever package of recovery measures (totalling €1.8 trillion) in Europe to support workers, businesses and governments.

On the part of the Eurosystem, comprising the national central banks, including the Bank of Greece, which together with the European Central Bank (ECB) conduct monetary policy in the euro area, we have adopted exceptional and bold monetary policy and banking supervision measures aimed at addressing three major challenges: first, stabilise financial markets; second, ensure the continued flow of credit to every economic sector across the euro area; and third, rein in deflationary pressures. At the meetings of the Governing Council of the ECB, as early as last March when the first signs of the new crisis became visible, we made swift and effective decisions in order to preserve favourable financing conditions and facilitate lending, on top of the measures already in place prior to the pandemic, including a zero interest rate on the main refinancing operations and a negative deposit facility rate.

Specifically, we decided to promptly introduce the Pandemic Emergency Purchase Programme (PEPP) to play the dual role of stabilising financial markets and providing additional monetary accommodation.

In terms of its first role, i.e. smoothing out financial shocks, the design of the PEPP allows a high degree of flexibility in the composition of purchases, thereby ensuring the effective transmission of monetary policy across the euro area. More specifically, the monthly purchase volumes are not fixed but may vary over time depending on the prevailing financial conditions. Also, while the benchmark allocation of public sector securities across jurisdictions is guided by the key for subscription to the ECB’s capital of each national central bank (reflecting the size of its economy), national central banks have been given the discretion to conduct purchases temporarily in deviation from that capital key. This flexibility helps to address impairments in the monetary policy transmission mechanism, as a result of investors’ flight to safety amid uncertainty, and to counter fragmentation risks in the euro area.

Why is flexibility so important for the effectiveness of the PEPP? At the onset of the pandemic, some European countries were severely hit, while for some others the impact was comparatively milder. Given this unevenness, the former group of countries faced heightened uncertainty, high volatility in their financial markets and a surge in their government bond yields. Their yield spreads versus the latter group of countries, which saw milder increases in their yields, thus skyrocketed to high levels. Purchases under the PEPP, which were allocated relatively more towards bonds issued by harder hit countries, succeeded in drastically reducing those countries’ government bond yields and spreads.

As far as Greece is concerned, a crucial role in the stabilisation of domestic financial conditions was also played by the waiver of the minimum credit quality requirements, applicable under the existing Public Sector Purchase Programme (PSPP), which was granted for securities issued by the Greek government, making them eligible for PEPP purchases. This decision is a prime example of the efficiency related to the PEPP’s flexibility: as soon as the programme was announced, the Greek government bond yields declined sharply and now stand below their pre-pandemic levels. Guided by the need to safeguard the singleness of monetary policy throughout the euro area, the eligibility of Greek government bonds both for purchases under the PEPP and for acceptance as collateral by Greek banks in the Eurosystem liquidity providing operations should be maintained, although the credit rating criteria are not met, as decided in April along with a package of temporary collateral easing measures.

The second role of the PEPP refers to providing additional monetary stimulus, further to that already achieved through the Asset Purchase Programme (APP) implemented since 2015 in response to the then financial crisis. By purchasing bonds directly from banks, as well as corporations, we provide them with additional funding. This reduces their funding costs and facilitates banks’ capacity to increase credit supply, thus supporting consumption and investment. Hence, we are contributing to economic recovery and to inflation converging to rates consistent with price stability. In particular, the total APP holdings of the Eurosystem currently amount to almost €3 trillion, including the additional envelope decided last March (of €120 billion until the end of 2020). This amount is further augmented by the amount of assets purchased under the PEPP, which reached over €700 billion during 2020. Net asset purchases under the emergency programme will continue flexibly for at least until the end of March 2022 and in any case until it is determined that the pandemic crisis is over, up to a total amount of €1.85 trillion, as we decided at the Governing Council’s meeting on 10 December 2020, taking into account the continued pandemic-related negative effects on inflation and growth. Furthermore, given the need for support over a protracted period, we have decided that the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2023.

With a view to ensuring that banks have sufficient liquidity and access to funding so that they can lend to households and firms at favourable rates, we deemed necessary to conduct additional pandemic emergency longer-term refinancing operations (PELTROs) and to effectively ease the terms for the third series of targeted longer-term refinancing operations (TLTRO-III). The interest rate on these longer-term operations (together providing liquidity of about €1.75 trillion at the current juncture) was set at negative levels, which in the case of TLTRO-III may even reach –1% for banks that maintain a steady growth rate of new loans to the private sector (PELTROs: –0.25%). Moreover, to facilitate banks’ participation in such operations, which are to be conducted until the end of 2021, we have decided that counterparties should benefit from collateral easing measures and that the range of eligible securities accepted as collateral should be temporarily expanded. In combination with the easing of banking supervision rules, such as allowing banks to operate with a lower capital adequacy ratio during the pandemic period and extending the flexibility towards loan repayments, as well as with the provision of government guarantees to loans, the aforementioned monetary policy measures make a decisive contribution to the protection of borrowers and the support of credit expansion.

Following the adoption of the above measures since the pandemic outbreak, the size of the Eurosystem’s balance sheet has grown from about €4.7 trillion in early 2020 to more than €6.9 trillion in December (over the same period, the balance sheet of the Bank of Greece has increased from around €110 billion to around €175 billion). The effectiveness of our prompt and decisive monetary interventions is evidenced by a normalisation in financial conditions and a strengthening of macroeconomic outcomes. As estimated by the ECB1, the package of these measures could add 1.3 percentage points to euro area GDP growth and 0.8 percentage points to inflation in the period 2020–2022, while it has helped to preserve one million jobs. Without these decisions, we would have faced much lower growth rates and more negative inflation rates than those currently observed.

Nevertheless, there is no room for complacency. We are currently amidst the second wave of the pandemic, which creates renewed uncertainty among citizens. We estimate that this uncertainty will remain elevated until an effective vaccine becomes widely available, which is expected in mid-2021. Until then, the necessary social distancing measures exacerbate the economic fallout of the pandemic and hamper the recovery. In light of the above, fiscal and monetary policies need to remain expansionary and mutually reinforcing, continuing to support citizens’ incomes, output and consumption across the euro area. We, the members of the Governing Council, are ready to adjust the instruments available to the ECB as appropriate in order to ensure that inflation moves on a sustained path towards levels consistent with our primary objective of price stability and that the euro area economy will recover.

In tandem with our monetary policy decisions, which are based on an assessment of financial conditions and current macroeconomic developments, since the beginning of this year we have been reviewing our monetary policy strategy. The aim of the review is to make sure that our strategy is appropriate for delivering on our mandate to maintain price stability. The strategy was last reviewed in 2003 and since then the world has undergone profound changes which call for a re-definition of our strategy. More specifically, a substantial fall in the natural interest rate (i.e. the interest rate at which the monetary policy stance becomes neutral) has been observed, diminishing the scope for an expansionary monetary policy through the conventional interest rate adjustment, as policy rates have reached historically low levels. Furthermore, developments such as the changing financial environment and the rapid digitalisation (including digital currencies), climate change, globalisation, as well as the slowdown in productivity and the ongoing population ageing, pose new challenges for central banks.

One of the issues to be addressed as part of our strategy review is the desirable level of inflation we should be aiming for, in order to ensure price stability in a perfectly symmetric way, thereby reducing downward deviations from the inflation aim. We will also evaluate the appropriate methodology for inflation measurement as well as the methods applied in our economic and monetary analyses. It is very important for our prompt and effective reaction to possible future shocks to fully grasp how inflation expectations are shaped, but also to incorporate the non-standard monetary policy measures that we have implemented over the past few years into our standard toolkit. Last but not least, we must incorporate the lessons learnt from the recent crises, as well as the need to respond to new challenges, so that our strategy becomes as effective as possible both now and in the future.

Our strategy review process is expected to be finalised next year, taking also into account feedback from the general public, as we wish all citizens to understand our mission and our decisions.

In this regard, your personal views on the following topics are indeed valuable:

What does price stability mean for you?

What are your economic expectations and concerns?

What other topics matter to you?

How can we best communicate with you?

We look forward to receiving your views and opinions through your participation in the Simulation Conference, a synopsis of which will be considered by the Governing Council of the ECB. You may also follow the relevant events currently organised by the Eurosystem.

The ECB held on 21 October a virtual event, bringing together a range of civil society organisations, hosted by President Christine Lagarde and Chief Economist Philip Lane. The event was broadcast live on the internet, while a summary report was published after the listening phase. Furthermore, the ECB offered all citizens the opportunity to express their views via the ‘ECB Listens Portal’ to better understand their perspectives on the economy and what they expect from their central bank.

On our part, we have scheduled our own listening event entitled ‘The Bank of Greece Listens’ in early 2021, with the participation of social partners and with the aim of promoting dialogue on the monetary policy strategy.

In closing, I would like to congratulate all those who have made this conference possible.